What do outstanding checks mean?

Key takeaways

• An outstanding check is a check that the issuer has issued and posted to his or her account but that the recipient has not yet cashed or deposited.
• Refusing a check can result in bank fees, legal penalties, and damage to your credit score.
• If a check remains outstanding for too long, it may become stale, meaning the bank may not honor it, usually after six months.
• Outstanding checks are deducted from the bank balance during reconciliation to reflect the actual amount of funds available in your account.

Definition of exceptional check

So, let's look at all the details. An outstanding check refers to a check that someone has written and issued from their checking account, ensuring there are sufficient funds to cover it, but the recipient has not yet cashed or deposited the check into their bank account.

Over time, if the recipient does not cash the check or deposit it, it may become an expired check.

Stale checks are those that have not been cashed within a certain period, usually six months, after which banks cannot honor them without a stop payment order or reissue.

What is done with outstanding checks? To manage outstanding checks, the issuer must monitor its bank accounts periodically to ensure that all checks are accounted for and that there are always sufficient funds available to cover the checks when they are finally cashed.

If a check remains outstanding for too long, the issuer may choose to stop payment on the check to prevent it from being cashed after it becomes stale, thus protecting the funds in your checking account.

The process involves contacting the bank to officially stop payment on the outstanding check and possibly issuing a new check if necessary.

What causes outstanding checks?

There may be a few different reasons why you may have an outstanding check:

• The payee simply has not yet deposited the check for personal reasons.
• The payee could forget or even lose the check you sent them.
• Sometimes checks do not reach the payee and are lost in the mail or returned if the address is incorrect.

The risks and benefits

Outstanding checks are not always a problem, but they can pose risks. If someone writes a check and spends money before cashing it, they could overdraw their account.

There is also a risk of fraud if a check is lost or stolen before depositing it, as someone could alter the name or amount of the payee.

Additionally, these controls can cause accounting problems, making it difficult to maintain accurate financial records and could complicate audits or financial reconciliations.

They can also make cash flow management difficult because it is not clear how much money is actually available if many checks have not been cashed.

However, outstanding checks have benefits. They allow instant cashless payments and provide a way to track payments, offering a paper trail of transactions.

They can also delay payments, which could help you better manage cash flow by keeping funds in the account longer to earn more interest.

Outstanding Business Checks

When a company writes a check, it records the amount in its general ledger, but if the check is not cashed, the bank balance appears higher than the general ledger shows.

To keep financial statements accurate, businesses must adjust the balance on their bank statements.

Businesses must also follow unclaimed property laws, meaning uncashed checks must eventually be turned over to the state.

It is critical that businesses quickly communicate with recipients about issued checks, especially considering potential postal delays.

Ensuring recipients have correct contact information is vital to preventing checks from being lost. Maintaining a detailed record of all communications related to outstanding checks is important for resolving any issues with uncashed checks, including reconciling payments with invoice statements to detect lost or misapplied checks.

How to avoid the use of outstanding checks?

• Keep close track of checks issued.
• Confirm receipt with the beneficiaries.
• Use electronic payments when possible.

How do I reconcile outstanding checks with my bank statement?

• List all checks issued that do not appear as cleared on your bank statement.
• Subtract the total amount of outstanding checks from the ending balance on your bank statement to adjust your accounting balance.
• Verify that all transactions match between your records and the bank statement, adjusting any discrepancies.

To clear a check, contact the payee to encourage them to cash it or, if too much time has passed, stop payment and reissue a new check.